Los Angeles-based Canyon Capital Advisors LLC, which acts as adviser to funds and accounts that hold over 8 million shares, or approximately 6.3% of the outstanding shares of Rowan Cos. plc, advised Rowan's board of directors that it intends to vote against the proposed merger with Ensco PLC due to a number of concerns.
In a Jan. 4 letter, the advisory group told board members that the proposed merger, which was announced in October, does not adequately account for disparities in the companies' operational risk profiles or its financial risk profiles.
These inadequacies increase the risk to Rowan shareholders by tying the company's success to Ensco's older fleet of midwater and deepwater offshore drilling rigs and increasing exposure to more volatile segments of the offshore drilling industry, and by adding significant balance sheet leverage as a result of Ensco already carrying $5.2 billion in long-term debt, with significantly greater intermediate maturities than Rowan has, and having nearly $400 million less available cash and short-term investments than Rowan.
The advisors also said the offer for Rowan's shareholders to receive 2.215 Ensco shares for each of their Rowan shares is "wholly inadequate," representing no premium on the closing price of Rowan's shares the day before the transaction was announced and less than the "also entirely inadequate" 2.5 share exchange ratio Ensco had offered previously.
"The lack of a premium for Rowan shareholders fails to compensate them for the vastly increased risk that Ensco brings to the combination," Canyon Capital Advisors said.
The advisory group called the proposed merger a "risky, dilutive transaction" that is the result of a "flawed sales process," and while Canyon Capital generally supports strategic transactions to capture synergies and unlock value for Rowan shareholders, based on its concerns with the Ensco proposal, it said it will vote against the merger.